Piketty for Progressives

Tue 16th Sep 2014

From Marx to Kuznets, or Apocalypse to Fairy Tale

As we have seen, Piketty rejects Marx's views about the future of capitalistic inequality, which he called "Apocalyptic", and in this section he will also reject the views of Simon Kuznets (1901-1985) which he finds too optimistic. Kuznets engaged in empirical studies and arrived at the view that as capitalism became more advanced income inequality would decrease-- on the principle (mis-attributed to President Kennedy) that "a rising tide lifts all boats."

Although Piketty does not accept Kuznets’ conclusions, he credits him with being the first to empirically utilize two sources of information which must be used in conjunction to be able to meaningfully study income inequality and its evolution - i.e., growth of national income for a country and the distribution of that income to individuals. It was using such information that Kuznets arrived at his views regarding the decrease of inequality. The question is-- did the data reflect universal trends within advanced capitalism or just an historical fluke? If the latter then Kuznets’ theory was a "fairy tale"-- as Piketty suggests by this section title.

The Kuznets Curve: Good News in the Midst of the Cold War

In this section Piketty says that Kuznets admitted his statistical discovery of a decrease in inequality in the US (the period covered was 1913 to 1948) was “largely accidental.” In his 1953 book Shares of Upper Income Groups in Income and Savings he even admonished his readers not to jump to conclusions based on his data. But that is just what he did himself two years later in a famous lecture where he proposed a bell curve to explain the relation between capitalism and inequality. As capitalism begins to develop inequality increases between the capitalists and the general population and peaks just as capitalism becomes mature and widespread, thereafter it begins to decline as the benefits of the capitalist system begin to be shared by all.

Even in this lecture Kuznets says his statistics reflect unique historical circumstances, but also suggests that, despite the historical specificity that shaped his curve, the inherent nature of the capitalist system itself would also work to produce the curve. This was simply cold war propaganda posing as science. Piketty points out that in the lecture Kuznets told his audience (it was a speech to the American Economics Association) that he was giving an optimistic twist to his theory to, in his own words,” keep the Third World “within the orbit of the free world.”

Nevertheless, despite this lecture and other papers, Piketty says that Kuznets showed the true “scientific spirit” in his big 1953 book (the supposed first use of meaningful statistical analysis) even if the Kuznets curve is a fairy tale. It was the two world wars and the Great Depression that brought about a decrease in inequality not the inherent tendency of capitalism.

Putting the Distributional Question Back at the Heart of Economic Analysis

Piketty thinks the question about how wealth is distributed is important. He says there has been a big increase in economic inequality since the 1970s— in all the developed countries, but especially in the US In the Third World it is possible that economic development may decrease inequality— especially the development of China. All of this, he says, is a cause “of deep anxiety.” He does not make clear why this should be so— whether it is the growth of inequality, the development of China, or both.

Also, markets that are supposed to exhibit “balanced growth” according to Kuznets and others (real estate, oil and financial) are showing remarkable “disequilibrium.” Piketty asks who will be running the show in 2050 or 2100 (i.e., controlling the world as it were). He lists several possibilities, one of which is the Bank of China. I can see the origin of “anxiety.” The Bank of China is ultimately under the control of the Chinese Communist Party (it is state owned).

In any case, the distribution of wealth becomes, for Piketty, the most important area of study if we are to understand the growth of inequality. To determine this we must collect data on the economic history of many countries and forecast future developments by a scientific understanding of past and present trends.

The Sources Used in Piketty’s Book Piketty says his work is basically an extension of the work begun by Kuznets in his study of the period 1913-1948 in the US. Kuznets’ statistical methods were extended to France, the contemporary US, and to other countries. But “the primary source of data” for the book comes from the World’s Top Incomes Database (WTID). [Google: The World’s Top Incomes Database].

Piketty says there are TWO components of income— from labor and from capital. He says labor income consists of wages, salaries, bonuses, non-wage labor, and income “statutorily classified”. Capital income consists of rent, interest, dividends, profits, royalties, capital gains, and “other income” from land, real estate, financial instruments, industrial equipment, etc. It is obvious that this is an un-Marxist way of treating income but Piketty can define his categories anyway he chooses since he is not a Marxist economist. We shall see later how useful, or not, his definitions are.

Piketty says his book “stands out” from those before it because he has “made an effort to collect as complete and consistent a set of historical sources as possible” for the study of the distribution of income and wealth “over the long run.”

We will resume the fourth installment of this commentary on Piketty’s introduction with the 9th section :“The Major Results of Piketty’s Study.”